July 3 (Bloomberg) -- The managers of hedge funds and private-equity firms, whose huge profits and lavish lifestyles have made them a target of Congress, are fighting back by portraying themselves as the champions of the little guy.

The Private Equity Council, a Washington-based trade association founded by Blackstone Group LP, the Carlyle Group and Apollo Management LP, has retained an army of lobbyists to derail legislation that would raise their taxes.

They have joined with allied Republican lawmakers and groups such as the U.S. Chamber of Commerce in a coalition that plans to show how pension funds, states and local governments have benefited from the high returns on their hedge-fund and private- equity investments.

The tax-raising legislation introduced in the House and Senate last month “affects blue-jeans-wearing Americans just as it does those working on Wall Street,” said Representative Eric Cantor, a Virginia Republican who is leading House opposition to the proposed tax increases.

Cantor said the coalition plans to take its message to lawmakers' districts over this week's Fourth of July holiday recess and show the legislation's impact on local residents’ jobs and pensions.

“The point of the group was to get folks back home talking to their members,” said Dan Gans, a lobbyist with Polaris Government Relations in Washington who has attended strategy meetings organized by Cantor.

`Working Americans'

Gans said the goal is to shift attention away from high- profile billionaires such as Blackstone co-founder Steven Schwarzman. The legislation “is not just about taking it to Blackstone,” said Gans. “It's hurting police officers, nurses, working Americans who have their retirement funds invested in any kind of managed fund.”

Robert Stewart, vice president for communications at the Private Equity Council, said the industry has “a compelling argument to make to anyone who is interested in economic growth, protecting pensions and ensuring that the tax system is fair.”

Legislation co-sponsored by House Financial Services Chairman Barney Frank of Massachusetts and Ways and Means Chairman Charles Rangel of New York would tax the share of profits that hedge-fund or private-equity managers receive for investment services at ordinary income-tax rates of as much as 35 percent, rather than the capital-gains rate of 15 percent.

A Senate measure introduced by Finance Committee Chairman Max Baucus, a Montana Democrat, and the panel's top Republican, Charles Grassley of Iowa, would require publicly traded investment partnerships such as Blackstone to be taxed at the corporate rate rather than the capital-gains rate.

Higher Fees

Opponents say that would lead to lower returns for the funds because managers will be forced to offset higher tax bills with higher fees.

“When you tax something more, you get less of it,” said Phil Kerpin, policy director of Washington-based Americans for Prosperity, an anti-tax group chaired by David Koch, executive vice president and a co-owner of Wichita, Kansas-based Koch Industries Inc. “It's naive to think that if you raise a tax rate you just get more revenue without any behavior change.”

Pension administrators are still trying to determine whether that argument makes sense. Jeannine Raymond, director of federal relations at the National Association of State Retirement Administrators, said her group is reviewing the legislative proposals. The Washington-based association represents the directors of state pension plans, which have $2 trillion in assets and provide benefits to more than two-thirds of all state and local government workers.